China companies defy stimulus efforts by borrowing to save

Linda J. Dodson

HONG KONG — Chinese companies are hampering official efforts to revive the economy during the coronavirus pandemic by borrowing from banks and hoarding cash at higher interest rates instead of channeling it into their businesses.

China’s central bank over the last two months has cut rates and boosted liquidity to try to spur banks to lend to companies. While the latest data shows that banks have done their part, companies facing an uncertain economic outlook are not using the loans as Beijing would want. Instead many are investing the borrowed money in short-term debt and deposits that, by using derivatives, can yield more than twice the rate of their loan.

With households also holding back on consumption and boosting savings, analysts suggested that regulators should cut deposit rates to reduce the incentives for such trades. China’s banks still use deposit rates set by the central bank and the rates have not changed since 2015.

“The ample liquidity and low borrowing cost after a series of monetary easing has created arbitrage opportunity for corporates, and the government’s reluctance to lower the benchmark deposit rate could intensify this issue,” said Judy Zhang, a Hong Kong-based analyst at Citigroup.

Reduced funding costs allow banks to extend loans to lower credit rated small businesses that form the backbone of the world’s second-largest economy. But the high levels of economic uncertainty because of the coronavirus are blunting the effectiveness of monetary easing just as the economy is set for its first quarterly contraction in at least 30 years.

China is expected to report on Friday that gross domestic product declined 6.5% in the first quarter of the year with annual GDP growth set to fall to 2.5%, the slowest in almost 50 years, according to a mean estimate of economists.

Since February, the People’s Bank of China — the central bank — has cut lending rates and banks’ reserve requirements to free up cash to encourage borrowing. Regulators have also asked lenders to cut interest rates and increase their tolerance for sour loans during the virus outbreak.

On Wednesday, the central bank cut the medium-term lending rate to a record low and reduced the reserves banks must hold, thereby releasing $43 billion in extra liquidity.

Data released by the central bank on Friday showed that loan growth has surged. New bank loans raced to a record 7.1 trillion yuan ($1.01 trillion) in the three months ended March 31, data from the PBoC showed on Friday. For March alone, bank lending tripled to 2.85 trillion yuan from 905.7 billion yuan the previous month.

However the data also showed that money in savings deposits, money market securities, mutual funds, wealth products and time deposits increased at twice the rate of cash and cash equivalents available — an indication that the extra loans are not finding their way into the real economy. Household deposits were also at three times the average levels seen between 2017 to 2019, the data showed.

The “stronger rebound” in short-term investments and savings deposits also points to sluggish consumption as the pandemic pushes households to tighten spending and instead top up their savings, Jenny Zheng, an economist at Morgan Stanley in Hong Kong said.

“The seasonal rise in new household deposits suggests that a larger-than-normal proportion of wage payout to households was saved rather than spent,” Zheng said.

While the economy is gradually picking up as factories resume and people return to work in China, economists warn that companies should brace for slower demand amid the possibility of a global recession. That has prompted businesses and households to pare investment plans and instead boost cash levels.

They are tapping short-term bond markets, where yields on investment grade debt have fallen by more than 100 basis points from levels seen at the end of 2019, and borrowing from banks at rates well below 1.5%. More than 500 billion yuan in high grade short-term bonds was raised in March, data shows.

They then parked all or part of the proceeds in wealth management products and structured deposits where yields are more than double their borrowing cost, data shows.

With deposits forming the largest part of Chinese bank funding, analysts said lower rates would allow banks to reduce lending costs and provide more loans to small companies with weaker credit histories.

While banks have been asked to support small businesses, for now they are catering to “to less risky small and medium enterprises, which may not have financing needs, and the only reason for those SMEs to borrow is to arbitrage,” Citigroup’s Zhang said.

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